BTC Report: Personal income tax is integral to North Carolina’s revenue system

Personal income tax is integral to supporting the state’s investment in public schools, public safety agencies, public health programs, and infrastructure development, according to a report released this morning.

North Carolina’s personal income tax represents half of the revenue collected by the state each year – $10 billion in 2011 – according to a new report from the Budget & Tax Center, a project of the North Carolina Justice Center. North Carolina’s reliance on the personal income tax has yielded state revenues that have kept better pace with the growth of the economy as well as residents’ incomes, the report said, contributing to long-term adequacy of the state revenue system and enabling North Carolina to better meet fast-growing demand for public investments and services.

Personal income tax is also critical for bringing the state’s revenue system closer to fulfilling the three primary principles of a responsible, modern revenue system – equity, adequacy, and stability.

Recent discussions of revenue modernization have included proposals to reform personal income tax, with lawmakers suggesting eliminating the personal income tax or replacing the current progressive income tax with a flat personal income tax. They’ve expressed concern that relying on the personal income tax could impede economic growth or encourage wealthier residents to move out of the state. However, the report said, research has found no statistical relationship between a state’s reliance on progressive taxes and measures of economic growth, and actually discovered that of the nine states that have adopted a personal income tax since the 1950s, six have seen higher income growth than the national average.

“The personal income tax ensures that state revenues can keep pace with economy growth and demand for public investments, and better aligns North Carolinians’ state and local tax contributions with families’ ability to pay,” said Alexandra Forter Sirota, director of the BTC and author of the report.

Better reform options exist that would align the state’s revenue system with key principles for modernization: equity, adequacy and stability. Broadening the personal income tax base to adjusted gross income (AGI) and creating a more progressive rate structure would both be crucial steps in reforming the state personal income tax, the report said, and could make it so that the system no longer asks for greater contributions as a share of income from those with the least to spare.

“Reforms to the personal income tax are certainly needed, but they should be done in a way that supports comprehensive revenue modernization and, in so doing, ensure that North Carolina is positioned to invest in economic opportunity for all,” Sirota said.